Fannie and Freddie: Budget Busters

It's looking increasingly like Fannie Mae and Freddie Mac are going to cost the US government much more than AIG.

In its latest long-term budget outlook
released in late January, the CBO projected that the AIG bailout would
ultimately cost the Treasury $9 billion dollars. Indeed, the entire
private financial industry bailout is ultimately expected to cost less
than $30 billion; of the $99 billion that the CBO expects we will
ultimately lose on TARP, half of the loss comes not from helping the
"banksters", but from the Obama administration's decision to bail out
the automakers. A further $20 billion will be spent on the Home
Affordable Mortgage Program, aka the administration's mortgage
modification plan.

By contrast, the nationalization of the Government Sponsored Entities is expected
to cost the federal government $64 billion between 2011 and 2020, on
top of the $110 billion we've already spent. Fannie and Freddie have
long defended themselves on the grounds that their underwriting
standards weren't nearly as bad as those in the private sector. But
they've certainly been better at socializing their losses; firms that
controlled maybe half of the mortgage market will end up costing the
taxpayer four times as much as the other troubled financial
institutions.

And that CBO report was issued before yesterday's
announcement that due to an accounting change, Fannie and Freddie were
going to buy back
many of their non-performing mortgages rather than continue to make
payments to the investors. For those who haven't been following along
at home, Fannie and Freddie guaranteed loans they packaged for resale,
which means when homeowners default, they have to make the payments.
This is expensive, so Freddie and Fannie have decided to repurchase the loans.

This is actually probably
good news for the taxpayer over the long run, because they'll be
borrowing money to buy out the investors at lower interest rates than
the interest rates on the non-performing loans for which they're
currently covering the payments. But it raises some disturbing
questions. First, why is an entity that is essentially an arm of the
U.S. government paying out extra cash in order to maintain some
accounting fiction? And second of all, how long before they have to do
this again?

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